China’s trade war manufacturing exodus could be hastened by EU-Vietnam trade deal, analysts say

The agreement offers Chinese firms incentive of low-tariff access to the European Union if they set up in Vietnam

Deal will eventually cut import duties by 99 per cent, which could also see a flood of European companies seek low-cost manufacturing in Vietnam, at China’s expense

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The new free trade agreement between the EU and Vietnam has been backed to lead to a further influx of Chinese investment in the country. Photo: Cissy Zhou

Published: 6:45pm, 3 Jul 2019Updated: 3:46pm, 4 Jul 2019

Vietnam’s booming economy will see another surge of new investment after signing a free-trade agreement with the European Union that could hasten the exodus of manufacturers from China, analysts said.

Now, Chinese firms looking to gain lower-tariff access to the European Union (EU) market are likely to be incentivised to open production in Vietnam, on top of the widespread supply chain shift that is already in motion due to firms seeking to avoid trade war tariffs on exports to the United States from China.

The EU-Vietnam Free Trade Agreement was signed on Sunday after seven years of negotiations, and was immediately hailed by the EU as “the most ambitious free trade deal ever concluded with a developing county”. Fully 99 per cent of customs duties between the two trading partners will be eliminated over time as part of deal.

Those Chinese manufacturers that have already set up in Vietnam could expand production, rather than in China, to gain low-tariff access to the EU. European companies seeking low-cost manufacturing are also likely to flock to Vietnam, potentially bypassing investments in China.

Adam McCarty, chief economist at Hanoi-based Mekong Economics, said the agreement will “speed up, slightly, the already fast movement of factories from China to Vietnam”.

“The main force behind this is China’s wealth, rising labour and other costs. The trade war adds a little to what was happening anyway, and this [free trade agreement] adds a little more. It is both Chinese and foreign firms relocating to Vietnam,” McCarty added.

The agreement will now be presented to Vietnam’s National Assembly and the European Parliament for approval. Once it enters into force, duties on 65 per cent of EU exports to Vietnam and 71 per cent of Vietnamese exports to the EU will be eliminated immediately. The remaining duties will be phased out gradually over the following 10 years.